What’s the recent history of microcap stocks?
Before you diversify your stock portfolio with microcap stocks, you need to be aware of its recent history.
Mid to late nineties was actually considered the Golden Age of microcap stocks. When the nineties ended and the 2000s rolled in, microcap investors suffered from generally bearish market conditions for almost two years.
Veterans of the microcap indices will tell you that the market conditions were so bad that the initial hubbub that fueled the interest in microcap stocks in the nineties melted away into thin air.
Because the trading volume and dollar volume of microcap stocks were low, even the wizened day traders of NASDAQ have kept themselves busy with other stock options.
How did the language and landscape of day trading change?
If you want a single event that truly defined day trading for the ordinary masses, it would be the birth of the Internet.
Don’t get me wrong though – I know that the Internet has been around since the seventies (some would argue sixties) but it was only in the nineties that people around the world truly embraced the World Wide Web.
Back in the day, stock brokers ruled day trading with their premium fees. It was exceedingly common for a broker to ask for $60 or even more for each trade.
Trading transformed itself seemingly overnight when the Internet became widely available. With online trading platforms, a trade can be made for as little as five dollars.
If you were a day trader, paying a live broker $60 didn’t make sense anymore – and so people opted for the more practical method of day trading.
This newfound sense of freedom made individual traders and institutions bold but at the same time, more cautious. The idea of being able to trade however way you wanted actually scared some people, because the broker was removed from the equation.
The general message that other day traders received was that they would no longer be able to take advantage of the “wisdom of brokers”.
The problem with this idea is that if you ask any day trader about their experiences with live brokers, they would tell you that good financial advice was almost never given. If they did receive any stock recommendations, there was always a bias because brokers are often associated with specific corporations and institutions.
Was this the type of advice that would make a day trader lose potential ROI? Not exactly! If a day trader was receiving biased recommendations in the first place, it’s as if he didn’t get any good advice at all.
Enter microcap stocks: the new frontier of the online day trading.
When it became apparent that online trading is the new norm, people became even bolder with their stock portfolios. New day traders and seasoned ones began paying attention to OTCBB stock or over the counter stocks (essentially nano-caps and micro-caps). It was easier than ever to trade and when there’s more freedom to do something, people naturally experimented more with the market.
The tremendous changes in the times also brought about the massive messaging boards that were frequented by traders from all walks of life. It was a truly inspiring and exciting time to be a trader because every time a trader would check, the OTCBB trading volume was up.
Eventually, the OTCBB indices hit the ceiling after the NASDAQ crash in the early 2000s.
When the medium-cap and large-cap indices go down, so do the microcap indices. Why? Because the people who were pumping dollars into the microcap indices were the same people who were investing in the medium-cap and large-cap stocks.
When the fan hit the ceiling, many of the big boys of day trading wanted nothing to do with stocks that were naturally volatile. They pulled out their money. In a matter of weeks, the OTCBB market was feeling the crash that was sending the NASDAQ and DOW JONES industrial average into a death spin.
Always remember: whatever happens to the medium-cap and large-cap stocks will eventually affect micro-cap and nano-cap stocks.
So before jumping into the pink sheet fan club, you have to do your research. You need study what’s happening to the larger indices because 100% of the time, the big trends in NASDAQ will have ripple impacts on micro-cap stocks. We’re not saying that you shouldn’t invest in microcap stocks… We’re saying go ahead – but treat microcap stocks with extra care as they are volatile!